Tax Credits

What are Tax Credits?

Tax credits are “dollar‐for‐dollar reductions of the income tax you owe” (TurboTax.com). They can reduce the amount of income tax you must pay to the government. For instance, certain “behaviors” that are economically, environmentally, or beneficial to the government (like replacing old appliances with new ones, purchasing solar panels, etc.), are rewarded with tax credits.

How it works
With tax credits, you can reduce the tax amount that you need to pay.. For instance, if you owe $500 in taxes and earn a $500 tax credit, your net liability decreases to zero. Certain tax credits are even refundable, meaning that you can still gain the entire amount of credit even if it is worth more than your tax bill. For example, if your tax is $500 and you earn a credit of $600, depending on the type of credit, you will receive a $100 refund.

Tax Credits vs. Deductions
Unlike tax deductions that reduce the amount of your income that is subject to tax, tax credits reduce your tax bill directly. This means that in most cases, tax credits will save you more money.

Types of Tax Credits
There are many different types and ways to earn tax credit. Below is a list of a few that you or your family may qualify for: